Question

The income statements for Home Depot, Inc. (HD) spanning the period 2014-2016 are found below: 2014...

The income statements for Home Depot, Inc. (HD) spanning the period 2014-2016 are found below:

2014

2015

2016

Earnings before interest and taxes

$7,316,000

$9,700,000

$9,425,000

Interest expense

   (696,000)

     (392,000)

     (143,000)

Income before tax

$6,620,000

$9,308,000

$9,282,000

Income tax expense

(2,410,000)

(3,547,000)

(3,444,000)

Net Income

$4,210,000

$5,761,000

$5,838,000
  1. Calculate the times interest earned ratio for each of the years for which you have data. What does this ratio tell you about Home Depot? What is your assessment of how the firm’s ability to service its debt obligations has changed over this period?
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Answer #1

Times interest earned = earnings before interest and taxes/interest expense

2014 = 7,316,000/696,000 = 10.51 times

2015 = 9,700,000/392,000 = 24.74 times

2016 = 9,425,000/143,000 = 65.91 times

Times interest ratio reflects the company's ability to meet the fixed interest obligations. Higher the ratio, better it is. Over the period, Home Depot's times interest earned ratio has increased considerably which means that the company is getting more and more financially stronger to meet its fixed interest obligations.

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